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Money
and Investing
Riding the hottest financial stocks
in Asia
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• The list of Asia's top
100 bank stocks
Hottest Frank Lim is spoiled for choice. As fund manager of the $29-million
United Global Capital Fund, he can invest in thousands of banks and
financial institutions around the world. The Singaporean likes to
keep his portfolio focused, however, so his fund owns only about 60
stocks. Lim spoke with Asiaweek's Cesar Bacani.
How do you see the environment for financial stocks?
There are increasing signs of a slowdown in [the developed] economies.
Second-quarter growth in consumption in the U.S., for example, is
about half of the rate in the first quarter. The risk of the Federal
Reserve going on a tightening mode [on interest rates] again is, in
our view, not entirely over. Higher oil prices could filter down to
inflation. However, that does not actually have much impact on U.S.
financial stocks because the Fed is clearly nearing the end of the
hiking cycle.
Many people are taking a leaf from history. Financial stocks outperformed
when the 1988 to 1989 and 1994 to 1995 rate-rise cycles stopped. What
we have right now in 1999-2000 could very well be similar. But there
was strong earnings growth in 1995. You will not see that in this
cycle. Both revenue growth and loan growth were only at 7% in the
second quarter, for example. Asset quality is also a worry [this time
around]. Sometime in June, U.S. regional bank Wacovia, a leader in
asset quality, had to increase its loan-loss provision. There is always
the risk that if the economy really tips over and the Fed hikes too
much, there will be defaults.
How do all these affect your allocations?
We are mildly overweight in the U.S. and aggressively overweight in
Asian banks. In Asia, the two markets we look at seriously are Singapore
and Hong Kong. There is a lot of value in other countries like South
Korea, but there are still some negatives. In Malaysia, loan growth
in the consumer sector is healthy, but that in the corporate sector
continues to be weak. Taiwan is still overbanked and the industry
faces structural problems like [inadequate] corporate governance,
poor transparency and lack of consolidation momentum.
The Philippines and Thailand?
Asset quality in both places remains a major concern and loan growth
is not very visible. There are still macro-economic risks — the
macro factors, not just earnings, drive Asian countries. The banks
are cheap, but we can afford not to own them.
How about Japan?
I still have lingering concerns about the credit situation there.
However, we do own Sumitomo Trust & Banking and Sumitomo Bank. The
group will become the second-largest financial operation in Japan
after the merger with Sakura Bank. Sumitomo companies are focused
on efficient management, follow a business model that emphasizes efficient
use of assets, have a high [capital-adequacy] ratio of 9.5% and are
ahead in cutting staff. We also own Bank of Tokyo-Mitsubishi [currently
the largest bank], but it is not a core holding.
Which Hong Kong banks do you like?
I'm not exactly excited about HSBC. We see fair value ranging from
HK$86 to HK$94. So there is a big premium in its current price [of
HK$116]. One thing that HSBC offers Hong Kong investors, and I think
that is why it has done well, is that 70% of its business is outside
Hong Kong, which at the moment is not exactly very attractive in terms
of business.
Margins have improved for Dah Sing Bank. It is the smallest bank [in
the territory] but its valuation is very undemanding. Hang Seng Bank
has a competitive advantage in funding cost. There is worry that after
deposit rates [on savings accounts] are deregulated in 2001, Hang
Seng Bank's margins would be affected. We have done our sums —
the impact will be limited to about 20 basis points because only 40%
of Hang Seng's deposits are demand deposits. People will continue
to bank with it because it has a lot of branches. The bank has a huge
customer base, which offers great cross-selling potentials. Hang Seng's
exposure to the mainland is also a positive.
What about Singapore?
We own UOB [United Global Capital Fund's ultimate parent], OUB and
DBS. The merger between DBS and POSBank is proceeding well, but you
still see costs escalating with spending on information technology
and personnel. Loan growth is best in OUB, followed by UOB. The disappointment
is with OCBC and DBS.
What other bank stocks do you favor?
In Korea, we own Kookmin Bank, a top-quality institution with a diversified
retail business, and one that has aggressively cleaned up its balance
sheet. It owns 74% of Kookmin Credit Card, which has done very well.
We don't have H&CB, but it is on our radar screen — its forecast
p/e is something like four to five times forecast earnings. We don't
have any investment in India at the moment, but we are looking.
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